In Favor of “Good Property-Defining Institutions” … and Opposed to Bad “Reforms”

            From its founding in 1847 and throughout the remainder of nineteenth century, the American Medical Association was convinced of one thing about patents: patented medicines were not only bad, they were unethical. The AMA’s initial code of ethics—which again did not change on this point throughout the nineteenth century—held that it was “derogatory to professional character” for any “physician to hold a patent for any surgical instrument, or medicine” and that it was “reprehensible for physicians to give certificates attesting the efficacy of patent or secret medicines, or in any way to promote the use of them.”[1] Such was the AMA’s hostility to patented medicines that in 1849 Dr. Thomas Edwards, an AMA member and Congressman, headed up a congressional committee that recommended as “an important measure of reform” legislation banning all patents on medicines.[2]

            Today, of course, the AMA has changed its position, and indeed it would be hard to imagine a modern medical practice in which a doctor abstained from promoting “in any way” the use of patented pharmaceuticals. My point here is quite straightforward: Not all proposed “reforms” of the patent system are good ones. In particular, readers should be skeptical—I think extremely skeptical—of calls to reform patent law by banning patents altogether or in a particular field. Such brute-force “reforms” have been proposed in the past, and history has shown that approach to be profoundly shortsighted.

Eli Dourado’s essay reviews some of the recent criticisms of the patent system and concludes with a call for “good property-defining institutions.” I’m with him on that. Who, after all, wants bad property-defining institutions? Indeed, with respect to the Federal Circuit, my co-author Craig Nard and I were two of the earliest critics of complete centralization of appeals in the Federal Circuit.[3] Last year Chief Judge Diane Wood joined us in that view (with a gracious acknowledgement of our work), and now in this essay Eli Dourado endorses the view too. I welcome the company.  

If, however, we want good institutions for the patent system (rather than merely embracing the simplistic approach of abolishing patents altogether), then details of reform are going to matter. And it’s in the details that Dourado and I disagree.

The most dramatic “reform” proposed in Dourado’s essay is that Congress should abolish by statute all patents on “both software and business methods.” That purported reform is precisely the sort of targeted patent abolition championed by the AMA and many doctors in the nineteenth century. The similarity does not end there.

Dourado’s essay spends quite a bit of time arguing, correctly, that open access to scientific and technical information can lead to significant innovation. That’s an old insight, and one that the patent system fully accepts. After a relatively short interval, all patented inventions fall into the public domain, where they are freely available to everyone as the building blocks of new innovations. Moreover, even during the duration of the patent life, the information contained in patents is freely available to all, and that information can, and indeed sometimes does, spur insights and innovation in completely different fields.

The crucial question is not whether the public domain can support innovation (it certainly can), but whether a system with no property rights and only the public domain produces the optimal level of innovation. On that point, the evidence supporting patent abolition—either generally or in a particular sector—remains utterly wanting.

Dourado’s essay cites a “natural experiment” supposedly providing evidence that “open access leads to greater innovation in science,” but that natural experiment emphatically did not involve eliminating patent incentives. Rather, the natural experiment involved providing researchers with more access to so-called “upstream” research products—in that case genetically engineered mice—and thus allowing those researchers to engage in more “downstream” research (even better genetically engineered mice). But, and this is the crucial point, those downstream researchers were not in any way prohibited from patenting the results of their research and, as the paper cited by Dourado makes perfectly clear, those downstream researchers were motivated by the potential for licensing revenue.

Here I will go into some of the all-important details. The paper cited by Dourado notes that one aspect of the “open access” agreement was that DuPont, the upstream or pioneering innovator and patent holder, eliminated its demand for what are called “reach through” rights, which would have given DuPont a share in the “licensing revenue from any commercial applications developed” by the downstream or follow-on researchers. Such reach-through rights reduce “the incentives to pursue more applied research stages” because the downstream researchers would have had to share their licensing revenue. Eliminating reach-through rights allows the downstream innovators to keep all the licensing revenue for themselves and, not surprisingly, the increased incentives yielded more downstream research. While this natural experiment may give insights into the optimal balance between pioneering and follow-on patent rights, it has (to put it mildly) limited value for showing how researchers would react to a hypothetical patent-free zone where there is no licensing revenue for anyone because neither upstream nor downstream research is patentable.

Again, I do not want to overstate my points. Invention without any promise of licensing revenue can certainly occur, but this is not news. Even in the nineteenth century, the opponents of patented medicines had examples in which doctors had struggled to invent without seeking patents. Thomas Edwards’s 1849 congressional report cited the “thirty years” of laborious work by Edward Jenner, who ultimately developed but did not patent a smallpox vaccine. (Of course, better historical work might have cast doubt on trumpeting the smallpox vaccine as the model of innovation without property rights, for Jenner merely rediscovered a vaccination technique that had been in the public domain for decades but that was neither commercially exploited nor appreciated.)

It is also not news that the patent system is imperfect. The critics of nineteenth century medicinal patents had some valid complaints. The patent system of the era was then (and is now) imperfect; it needed (and still needs) improvement. But the right reform then was not (and now is not) giving up and embracing a property-rights free zone in whole fields of endeavor.

If the real goal is “good property-defining” institutions—a goal I think worth pursuing—then I think policymakers should eschew blunderbuss solutions that call for the elimination of whole swaths of patents. Instead, I have long supported better enforcement of patent law’s key standard for patentability, which is supposed to prevent the patenting of “obvious” inventions. That doctrine has evolved over a century and half of steady and incremental progress in improved understanding about the appropriate limits of patentability.[4] (Indeed, this crucial doctrine didn’t even exist in 1849, which is one of the reasons that the AMA of the era had some justified complaints against the then-existing patent system.) In the twentieth century, the Supreme Court correctly identified the goal of the obviousness doctrine as being to restrict the award of patents only to “those inventions which would not be disclosed or devised but for the inducement of a patent,” but, as Michael Abramowicz and I have shown, current legal doctrine being applied at the Patent Office and the courts could (and should) do a much better job of reaching that goal.[5] 

Worrying about matters such as patent law’s obviousness doctrine has none of the flamboyance of a call to eliminate all software patents, but the targets of reform can be the same. Eli Dourado rightly criticizes Amazon’s 1-click patent as an example of a “low-quality software patent.” So have I—repeatedly.[6] But the problem with the 1-click patent is not that it’s on software but that it’s “low-quality”—it’s trivial; it’s obvious. The right solution to such “low-quality software patents” is not to get rid of all software patents (low-quality and high-quality), but to do a better job of getting rid of all low-quality patents (software or not). That’s not a flashy “let’s-kill-all-the-software-patents” approach. It’s boring; it’s incremental. But if the goal really is to get “good property-defining institutions” rather than simply to abolish property rights across fields of innovation, such incremental, boring improvements are what’s needed.



[1] Code of Medical Ethics of the American Medical Association 11 (Chicago 1897) (reprinting the 1847 code).

[2] H. Rep. No. 52, 30th Cong., 2nd Sess. 2 (1849); see also Joseph M. Gabriel, A Thing Patented is a Thing Divulged: Francis E. Stewart, George S. Davis, and the Legitimization of Intellectual Property Rights in Pharmaceutical Manufacturing, 1879 – 1911, 64 J. Hist. Med. 135, 143 (2009).

[6] See Duffy, Inventing Invention, 86 Tex. L. Rev. at 13-14; John F. Duffy, Rethinking the Prospect Theory of Patents, 71 U. Chi. L. Rev. 439, 504-505 (2004).

Also from this issue

Lead Essay

  • Public choice economics warns of regulatory capture - a scenario in which the regulated actors use lobbying to get favorable rules and regulators. When an industry writes its own rules, the rest of us may suffer, and Eli Dourado argues that that’s exactly what has happened in U.S. patent policy. Here, he tells the story of the Court of Appeals for the Federal Circuit, which for the last three decades has had exclusive appellate jurisdiction over patents. The Federal Circuit has tightened the law again and again, in what Dourado identifies as a classic case of regulatory capture.

Response Essays

  • B. Zorina Khan challenges Eli Dourado’s story of regulatory capture: The substantial growth of patent issuance in recent years is due overwhelmingly to an influx of foreign inventors, not to a flawed U.S. patent system. That system is neither broken nor even very different from its historical norms. Throughout our history, it has served us well, even if outsiders sometimes find it hard to understand. We should therefore resist any sweeping changes to it.

  • John F. Duffy likens software patents to medical patents. At one time, medical patents were considered unethical, but nowadays, they are considered an important tool for spurring innovation in a field that otherwise might not get much of it. Software patents are very similar, he argues, and they should not be abolished. Yet some reforms in the patent system make sense to him, including ending the complete centralization of patent cases in the Federal Circuit. Duffy takes issue with several of the empirical studies that lead essayist Eli Dourado uses to make the case for software patent abolition - these, he contents, do not show that total abolition would yield good outcomes. He suggests some reforms that this evidence may support instead.

  • Christina Mulligan tackles the problem of patents and innovation by looking at two different philosophies of law: In one approach, rules predominate. Rules are clear, simple, and easily enforced, but they may over- or underinclude problematic behaviors. In the other approach, standards predominate: Standards express in much more detail what constitutes good and bad behavior, but applying them can be costly for everyone involved. The choice between these two philosophies of law will always to some degree depend on the situation at hand. In this case, she favors a rule, which would be to end software patents. The costs of forming standards here are simply too high, she argues.